Egypt’s Gaza Crackdown Hammers Economy

An aggressive crackdown by Egypt’s interim government on smuggling tunnels between Egypt and the Gaza Strip is crushing the Palestinian enclave’s economy, sparking concerns it could fuel a militant backlash.

In the days after Egypt’s military pushed President Mohammed Morsi from power, the army led what local residents described as an unprecedented assault on the tunnel trade, strangling a lifeline for construction materials and fuel into the blockaded strip.

 Now three weeks after Mr. Morsi’s removal, many Gazans say the coastal territory of 1.7 million people is approaching an economic crisis that some observers worry could inflame militancy against neighboring Israel.

“The impact is very clear in Gaza: There is no fuel, there is no cement,” said Omar Shabaan, an economist who directs the Gaza-based economic think tank Pal Think. “Things are getting worse in terms of economic activity, which makes the social situation more difficult.”

Gaza suffered years of economic hardship under former President Hosni Mubarak, who tightly enforced the blockade, but the territory enjoyed a brief revival after his downfall and under his successor, Mr. Morsi. Gaza’s government is run by Hamas, a political party with an Islamist militia that is an offshoot of the Muslim Brotherhood, the group that backs Mr. Morsi. Now, Egypt’s interim military rulers are again cracking down on illicit trade in Gaza.

Ahmed Ali, Egypt’s military spokesman, said recently the government shut the tunnels in an attempt to prevent Hamas militants from attacking Egyptian forces in the adjoining Sinai Peninsula, where several soldiers were killed recently. Hamas denies it has any Sinai presence.

Residents in the sun-scorched town of Rafah, which straddles both sides of Egypt’s border with Gaza, say Egyptian soldiers armed with dynamite and earthmovers dug up hundreds of tunnels this month, turning the town on the Egyptian side into something resembling a cratered moonscape. Many Rafah residents say they have been left jobless as a result.

“Forget about rebuilding the tunnels. We’ll get a military trial,” said a man who gave his name only as Mohammed. Weeks ago, Mohammed said he was earning $30 to $50 a day ferrying goods, such as fuel, cement and steel to the tunnels’ mouths.

Israeli authorities say they have curbed the import of certain goods because they have a dual application for making weapons. The tunnels are also a known conduit for actual arms.

Israel has maintained a blockade on Gaza since Hamas, an avowed enemy of the Jewish state, wrested control of the strip from its secularist rival Fatah movement in 2007.

To get around the blockade, Gazans smuggle goods, and the tunnels’ closure has sent prices soaring in the past three weeks. Many Gazans now buy the Israel-shipped fuel for seven shekels ($2) a liter—more than twice as much as that smuggled from Egypt.

The cost of cement, another major smuggled item, has reached $1,500 a ton from $1,000, said Ahmad Abdul-Rahman, a merchant.

Ali Abu Shahla, a Gaza businessman, said construction in the enclave has all but halted. “We are stopping about $200 million in construction sites,” he said, citing a figure from the Palestinian Contractors’ Union.

The tunnels’ closure is also hitting Gaza’s government, which earns 15% of its budget from its trade. Alaa al-Rafati, Hamas’s economy minister, said the government has lost $230 million in tax revenue since the closures.

The economic devastation follows a relative boom period for Gaza. After Israeli commandos killed nine activists in a 2010 raid on the Gaza-bound Mavi Marmara protest boat, Israeli authorities answered a world-wide backlash in public opinion by lifting some restrictions on the flow of goods into Gaza.

Then, after Mr. Mubarak’s ouster in February 2011, and during Mr. Morsi’s subsequent year in office, Egyptian authorities largely ignored the tunnel trade. Cement and steel flowed freely and fueled a construction boom.

Gross domestic product in Gaza rose by nearly 15% in fiscal 2011 thanks to the relaxed restrictions, the International Monetary Fund says. Some dirt-covered tunnel diggers became millionaires.

“All economic activities were really activated by such materials entering Gaza,” said Hatem Owida, Gaza’s deputy economy minister. He said unemployment fell from a high of 40% two years ago to only 23% this year on the back of the construction boom, but is creeping back up again.

With Mr. Morsi and the Brotherhood no longer in power, Hamas has been left politically vulnerable. Some experts say that could prompt Hamas to negotiate a truce with Fatah or Gaza militants to lash out against Israel. Mr. Owida dismissed those notions.

So far, Hamas appears to be biding its time until the dust settles in Cairo. “They have kept silent for now. It’s not an easy situation for them. They need to see which direction Egypt is headed in,” said Mr. Shabaan, the economist. “They’re very, very disappointed.”

 Wall Street Journal